Hearing people say "I'm in debt" or "I have so much debt" is not all that uncommon. In fact, it is pretty rare for anyone over 18 years of age to not have any debt at all. Car loans, student loans, home mortgages, credit cards, personal loans, etc., are all forms of debt. But how much debt is too much? To determine how much debt is too much, you need to look at your debt to income ratio which is the measurement of total monthly bills and expenses divided by how much money you make each month. Many financial experts would advise that if your debt to income ratio exceeds 40 – 45%, you may be heading for financial trouble.
If this is the case for you, it is time to put a plan in place to get out of debt. The following methods are just a few strategies that can prove successful to help you get out of debt.
Paying off credit card debt
Paying off your credit card debt is a critical step in improving your debt to income ratio and getting yourself into a more comfortable financial situation.
The best way to pay off your credit card debt is to pay more than your minimum monthly payment per month. While this applies to more than just credit cards, paying more than the monthly amount due each month will help you to pay off your debt faster and will help you to accrue less interest over time.
Also, extra income is always helpful. So, if you have the time and can manage it, consider picking up a part-time job or looking for another way to earn money. Babysitting, lawn and garden work, delivering pizzas, etc., can be great ways to earn extra income. Plus, now with freelance sites like UpWork, Thumbtack, and Fiverr, plus Uber and Lyft and food delivery companies like PostMates, Grubhub and more, it is easy to find a way to use your talents to earn extra income.
How to pay off credit card debt
Many people are unsure how to go about paying off their credit card debt. If paying more than your monthly payment each month is just not cutting it, here are a few other tips to help you get those credit cards paid off faster.
- Try the Total Money Makeover Debt Snowball approach.
- Work with your credit card company to negotiate a lower interest rate.
- Look into balance transfer opportunities between your cards.
With this method, you list out all of your debts in the order of smallest to largest. Then, for all of your debts, you pay the minimum payment, but then you take any excess funds you have for that month and you apply that as an additional payment toward the lowest debt line item. Once that debt is paid off, you then move onto the next sized debt, and so on, and so on. With this approach, your pay-off will ramp up exponentially as with each debt you pay off, you'll have more funds available to apply to the next.
With this method, you should list out your various credit card companies, the amount you owe, and the corresponding interest rate, with the highest interest rate at the top. When calling on the credit card companies, prioritize those cards with the highest interest rate and those where you have had the longest relationship (hopefully in good standing). Credit card companies value loyalty and may be more willing to work with their long-standing customers.
When you make the call, ensure you are polite, and explain that you would like to ask about current promotions or options to reduce the interest rate on your current card. In some instances, the company will have a temporary promotion available to you, or will be willing to offer you the same promotion as they would for a new customer (many times, credit card companies offer 0% interest options to new customers for the first six to twelve months).
Make sure you maintain professionalism and a respectful, friendly tone during the conversation. But this doesn't mean that you should not be persistent. If you are told no, then politely ask to speak to a manager, and try again. If you are told no again, you are no worse off than you were, but you may want to make a note about this card company for future reference, as it may not be a company that you want to do business with long term.
If you haven't maximized the utilization on one of your cards and that creditor offers a balance transfer promotion, this is definitely something to consider. Often, creditors will offer 0% interest for six months or even one year for balance transfers for just a small transfer fee which is often far less than the monthly interest you are paying.
Debt consolidation companies
If you find yourself in a situation where you can't pay the minimums on your credit cards, loans, or mortgage, you may want to look into a debt consolidation program. The key reason that consumers consolidate their credit card debt is because the interest rates on the existing credit card term is too high and the amount of interest that will be paid over a three- or five-year term is too much to fathom. With debt consolidation, you can take your high-interest cards and loans and combine them into one loan, often with a lower monthly payment and a lower interest rate. This allows you to pay off your debt faster while incurring less fees along the way.
While there are several pros and cons to debt consolidation loans, a critical first step is to look into a reputable debt consolidation company that can help you negotiate with creditors to lower your monthly payment and fees.
This recent article by the balance lists the eight best debt consolidation loans of 2019. Further, as the article states, you can save hundreds if not thousands of dollars over the course of your loan with the right debt consolidation program.
Debt relief programs
Also known as debt settlement or debt forgiveness, debt relief programs are designed to help a consumer pay back their debt via monthly payments over a period of time, but at a lesser amount than the consumer incurred.
With this alternative, you need to understand that your payback terms have been modified and you may be absolved of some of the debt that you had. In these situations, the settlement is reported to the credit bureaus with an indication that the account was either settled or settled in full for a lower balance. This sends a flag to the bureaus that you did not pay the agreed upon amount, and it will have a negative impact on your credit score, even if you made your payments on time.
This said, many people decide to go this route because they find it difficult to negotiate with credit card companies on their own.
Debt management is all about responsibility, education, and making good choices. Understanding your debt to income ratio will help you determine if it is time for you to get busy reducing your monthly debt, and may also help you better understand when you can safely take on that next big expenditure.
Top Ways to Decrease Your Debt
Drowning in debt is never a good feeling. It can be easy to get overwhelmed with how much of a hole you have dug yourself. Often, when you have a lot of debt, it is much easier to get into even more debt.
However, let not your heart be troubled. There are effective, proven ways to start decreasing your debt and getting control of your finances. It may not be quick or easy, but if you stick to these steps, you can do it!
Make a Budget
If you are going to effectively pay down your debt, you need to know how much money you are making and what expenses you have. When you make a budget, you do not need to start cutting expenses immediately. All this step is for is being able to get a good look at exactly what you are working with, including the debt you have.
An easy way to do this is to use a spreadsheet program. Google Spreadsheets is a free program online that will let you see your finances nice and clearly.
Determine Your Discretionary Income
Once you know how much money is coming in and how much is going out, it is time to do a bit of math. Subtracting your expenses from your income will give you an idea of how much discretionary income you have. This is potential income you could use to start paying down debts.
It is important to note that "expenses" in this budget are fixed, reoccurring expenses. Things like rent, a mortgage payment, internet service, etc. It is NOT groceries or your daily morning coffee.
It Does Not Appear I Have Any Discretionary Income
If your expenses are greater than your income, you have a budget deficit. What this practically means is that you should not even be thinking about paying down debt. Instead, you need to cut your expenses. There are a lot of different things you may need to do to cut your expenses, but here are a few things to consider:
- Refinance Your Mortgage
- Cut Cable
- Lower Your Car Insurance
- Get a Balance Transfer
You may need to get a lower interest rate to lower your monthly mortgage payment. You may also need to change the length of the loan. A loan with a longer life will have lower monthly payments. You will end up paying more money in the long run, but for right now you need breathing room in your budget.
You do not need cable. Full stop. If you have cable or satellite tv, it needs to go. You can replace it with a low-cost streaming service like Netflix or Hulu. If this breaks your heart, remember you can always get it back when your budget is under control.
You may need to negotiate a better car insurance rate or shop for a new provider that can offer a lower monthly cost.
If one of your fixed expenses is large credit card debt, consider a balance transfer. You can often get a much lower interest rate or grace periods for not making payments. This is temporary to get your finances back on their feet, so do not put this off too long.
Oh, Hey, I Have Discretionary Income!
Congrats! We knew you could do it. Now, you need to take part of that discretionary income and start attacking your debt. There are generally two kinds of debt you will want to tackle first: your smallest debt or your highest interest debt.
If you have a small loan you are making payments on, quickly paying it off can let you follow a process called the debt snowball. If you were paying $10 per month on that loan and it gets paid off, you can now apply that $10 to the next highest debt and so on. The snowball of payments get larger and larger, which can frequently make quick work of even the largest debt.
If you have a high-interest loan, you may want to consider tackling that first, depending on how much it is. Common examples of high-interest debt are credit card debt, payday loans, cash advance loans, and title loans. Depending on how much discretionary income you have, you may want to start tackling these toxic loans first, as they are likely costing you hundreds of dollars a month in just interest.
That is a general technique for tackling debt. However, special kinds of debt have special kinds of tools that can be used to pay them off.
Student Loans Can Be Forgiven
If you have student loans, you may qualify to get them forgiven. There are several requirements for this. The biggest one is that this only applies to federal loans (often called direct loans). From there, you can do one of the following:
- Join AmeriCorp or the Peace Corp
- Work for a 501(c)(3) Non-Profit
- Work for a non-profit that has a qualifying main purpose
If you qualify, make consistent payments for 10 years, and then apply for them to be forgiven. It is a great program!
Student Loans Can Be Consolidated
If you are struggling to keep up with student loans, consider consolidating them! This means that all your separate little loans become one big loan with an interest rate that is the average of all loans being compiled. The biggest advantage to this is that you generally get a single loan payment instead of several, which can open up some room in your discretionary spending. This can allow you to more quickly pay off other loans and then come back to this one with the debt snowball ready!
Just like Mortgages, Car Loans Can Be Refinanced
If you are stuck in a high-interest car loan, it may be too large to try and tackle right off the bat. However, refinancing an auto loan can give you more favorable loan terms and make repayment easier. You can change the loan length or the interest rate, just like you can with a mortgage refinance.
